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Contractual restrictions on insider trading: a welfare analysis

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Summary.

This paper analyzes the welfare effects of permitting firms to negotiate contractually the right to allow corporate insiders to trade shares in the firm on private information. A computational framework is employed to (i) analyze formally the effects of insider trading on managerial investment choice, the informational efficiency of stock prices, and the welfare of all investor types; and (ii) examine the effectiveness of various compensation schemes (such as stock and insider trading rights) to mitigate conflicts of interest between managers and shareholders. I show that shareholders will typically choose not to grant insider trading rights to managers. This decision is socially optimal.

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Authors and Affiliations

  1. Anderson Graduate School of Management, U.C.L.A. 110 Westwood Plaza Box 951481, Los Angeles, CA 90095-1481, USA (e-mail: abernard@anderson.ucla.edu) , , , , , , US

    Antonio E. Bernardo

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  1. Antonio E. Bernardo
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Received: September 23, 2000; revised version: December 12, 2000

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Bernardo, A. Contractual restrictions on insider trading: a welfare analysis. Econ Theory 18, 7–35 (2001). https://doi.org/10.1007/PL00004135

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  • DOI: https://doi.org/10.1007/PL00004135

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